Lower energy prices not enough to tame the service sector

December 12, 2023

The Consumer Price Index (CPI), edged up 0.1% in November after flatlining in October. The two-month move in the CPI, which was close to unchanged, was the weakest two-month move in the index since the depth of the COVID recession in March and April of 2020. The CPI rose 3.1% from a year ago in November, down from 3.2% in October. That is the lowest annual pace of growth since June 2023, which was held down by a surge in price levels the year prior; inflation peaked at slightly above 9% in June 2022. The index for food increased 0.2%, with a slowdown in the pace of increases at the grocery store offsetting a slight acceleration in prices at restaurants. Meat prices finally moderated after surging late summer and into early fall. Turkey prices edged down only 0.1% during the month but were up 5% from a year ago. One of the biggest outliers was the price of eggs, which jumped by 2.2% during the month.

Core CPI, which strips out the volatile food and energy components of inflation, rose 0.3% in November, a slight acceleration from the 0.2% of October. That translates into a 4% increase from a year ago, the same as we saw in October. The three-month annualized moving average on the core CPI, which better tracks momentum in underlying prices, rose 3.4%, the same as October. Both measures are still well above the Fed's 2% target. The core tends to be a better predictor or where prices are going than the overall measure of CPI inflation.

Shelter costs, which represent the largest single component of both the overall and core, rose 0.4% during the month, slightly faster than the 0.3% gain in October. The only item to decelerate during the month was hotel room rates, which continued their descent. Rents and homeowners' equivalent rent both advanced 0.5% during the month, a little faster than hoped. The drop in new lease prices for apartments, which takes a while to show up in new lease prices, has yet to fully make its way into pricing measures.

The super core services index, which strips out goods and shelter costs and is watched most closely by the Federal Reserve, defied gravity and rose 0.4% in November, double the 0.2% pace of October. Gains in everything from insurance costs to household operations more than offset a decline in the costs of streaming services and pet care. The super core rose 3.9% from a year ago, much faster than the 3.7% annual gain we saw in October and its hottest pace since August 2023. The three-month annualized average jumped 5.2% from 4.9%. That is more worrisome for the Federal Reserve, which is meeting today and tomorrow to determine its next policy move.